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This article appears in the June 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

With baby boomers retiring in droves, unprecedented opportunities abound for younger financial advisors looking to purchase a book of insurance. Due diligence is essential to ensure the prospective book is not just healthy, but also the right fit for your practice.

“Don’t try to buy something you don’t understand, because then you’re going to wreck a client. You’re going to wreck the relationship and nobody wins,” said Elke Rubach, president of Rubach Wealth in Toronto.

“The first thing you want to look at is the age of the existing business and the market it serves,” said Gary Clark, president of Clark Insurance Advisory in Edmonton. If, for example, a book consists of older clients, the renewal commissions they generate over the short term might be substantial. But as those clients die, they will need to be replaced, Clark noted.

Insurance advisors also need to be cautious about books that feature a high turnover of clients and exhibit product “churning.”

“If [an advisor is] constantly replacing their sales [to existing clients], that’s not a good sign. They’re doing that to generate more commissions, not necessarily acting in the best interests of the client,” said George Hartman, CEO of Market Logics Inc., a Toronto-based coaching and consulting firm. If those clients discover they were subject to churning, they’re likely to resent having been mistreated, he said.

Clients also could be resentful if they have paid premiums for universal life insurance for decades but only amassed a small cash value for their policy, Rubach said.

She recalled being presented with a proposal for a book of underserved older clients who were angry at their previous advisor for neglecting them. She turned down that offer, in part because it would have meant spending considerable time trying to patch up relationships.

“You’re risking your reputation if you can’t [serve clients], if you can’t talk to them, if you can’t reach them,” Rubach said. “So, when you sit down with a selling advisor, you need to go through their client list one by one. If the advisor can’t tell you anything about [each client], that’s a problem.”

Common mistakes advisors make when purchasing a book of insurance include insufficient digging to determine the seller’s true motivation. Rubach said sometimes people are forced to sell because they face a regulatory issue, while others might be selling as a result of financial distress.

Another mistake purchasers tend to make is relying too much on historical figures, such as revenue generated. “The value of any practice is basically a function of what it is going to do going forward, not what it did in the past, and so we need to be able to anticipate what the revenue will be after the sale,” Hartman said.

Clark stressed the importance of buying a book built for the longer term that includes younger clients who typically opt for cheaper, renewable term insurance. “You probably want to buy a book that has a lot of term insurance in place, such as 10-year term [policies that] can replace existing term [policies] on or close to a renewal or be converted to whole life or universal life coverage, providing further revenue opportunities,” he said.

Clark added that if he were to buy a book to start a life insurance practice today, he would want it to include group insurance and/or segregated funds. “Try and build up a renewal base that’s going to at least cover your expenses. The seg funds and group insurance really are like an annuity. That’s nice to have that base to be able to look after your basic expenses,” he said.

Rubach said she also checks to see whether clients have disability or critical illness insurance. If not, “that tells me that the recommendations to date may not have been so comprehensive, and that opens the possibility for a deeper conversation,” she said.

A common arrangement when purchasing a book of insurance is for the previous owner to stay on for a year or so to assist with the transition and retention of clients, Hartman said.

Few practices today are sold in exchange for 100% cash up front because of the risk that the revenue may decline when the original advisor leaves. “There’s usually some sort of a down payment, and then payout over something like two, three, four or five years,” Hartman said. A properly drafted deal should have either a retention or clawback clause to determine what happens if clients leave, he added.

“Say we anticipate that 80% of the clients will come over. If only 75% come, then we’re going to adjust the price, which is another reason for a payout over a period of time. You have the real experience to work with,” Hartman said.

Rubach advocates for a gradual takeover of a book of insurance, ideally, as part of a succession plan — “unless catastrophe hits,” which would make an entire takeover necessary. But even then, there should be a clear process in place before the acquisition begins, she said.